Construction contracts can be very long and complicated. Despite their complexity, they are often quite standard, and there are clauses common to the majority of these contracts. In this article, we explain two (2) commonly used contract agreements called Hold Harmless Agreements and Indemnity Agreements in Wisconsin. Specifically, we address the following questions:
- What is an indemnity clause?
- What kinds of indemnity clauses exist in Wisconsin?
- Is indemnity insurance required?
- What is an ‘indemnity’ agreement?
- What is a ‘hold harmless’ clause?
- What is a ‘hold harmless’ agreement?
- What is the difference between a hold harmless and indemnity agreement?
What is an indemnity clause?
Indemnity clauses are commonly seen in Wisconsin construction contracts. These clauses typically require subcontractors and material suppliers to take financial responsibility for any losses that occur during the performance of the construction contract. These parties take financial responsibility, or reimburse the other party if that party pays for any loss, regardless of who was at fault.
Though this clause may seem unfair, it is permitted and enforceable unless it is found to be unconscionable. It will only be found to be unconscionable when the clause is unreasonably favorable to the general contractor (the party who is not financially responsible for loss) and leaves the financially responsible party, the indemnitor, with no meaningful choice.
What kinds of indemnity clauses exist in Wisconsin?
There are three (3) different types of indemnity clauses: limited, intermediate and broad, which are categorized based on whose negligence the indemnitor (subcontractor or material supplier) must pay for.
In a limited indemnity clause, the subcontractor only assumes financial responsibility for their own negligence, if it was the sole cause for loss.
In an intermediate indemnity clause, the subcontractor assumes responsibility for its own sole or partial negligence. The subcontractor is not at fault if the general contractor is solely responsible for the loss. There are two (2) choices: full or partial. For full intermediate clauses, if the subcontractor is partially liable for financial loss, they pay all of the damages. This is true even if the subcontractor is only 1% at fault. Alternatively, for partial intermediate indemnity clauses, indemnity is scaled based on the extent of the subcontractor’s negligence.
In a broad indemnity clause, the subcontractor is responsible for all loss, regardless of who is at fault. This means that the subcontractor pays even if the general contractor is solely negligent. This is permitted in Wisconsin as long as the clause is specific in stating that the subcontractor will be financially responsible, even when the general contractor is the sole entity at fault for loss.
Is indemnity insurance required?
Wisconsin courts often implement liability insurance requirements in construction contracts. When they do, the placement of the insurance requirement is extremely important. These contracts may also require that the indemnitor add the general contractor or owner as an additional insured party.
It is important to note that many Wisconsin insurance policies have an exclusion for “contractually-assumed liability”. This specifically includes indemnity & hold harmless clauses, because otherwise, the insurer may be financially responsible for a third-parties negligence, which they may not foresee.
What is an ‘indemnity’ agreement?
An ‘Indemnity’ agreement is an agreement with an indemnity clause, one where one party, typically the subcontractor or material supplier, agrees to pay the other party, typically the general contractor or owner, for damages that result out of their contract, regardless of who is at fault.
What is a ‘hold harmless’ clause?
A hold harmless clause is a statement in a legal contract that absolves one party of responsibility for damage or loss, similar to an indemnity clause. It is an acknowledgement of risk and an acceptance of the risk despite its gravity.
What is a ‘hold harmless’ agreement?
A ‘Hold Harmless’ agreement is one whereby one party agrees to hold the other party harmless from any tort liability arising out of the first party’s negligent act or omission.
What is the difference between a hold harmless and indemnity agreement?
Indemnity and hold harmless agreements are very similar, and as such, are often woven together. The phrase, “…defend, indemnify & hold harmless” is found in many Wisconsin construction contracts. “Hold harmless” essentially requires one party to protect against actual and potential losses, while indemnification only requires protection against actual losses.
Contracts, especially Wisconsin construction contracts, can be difficult to draft and/or understand. It is important to understand the placement of certain clauses and their consequences. If you would like assistance understanding or drafting your Wisconsin construction contract today, contact our office at (630) 324-6666 or schedule a consultation.
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